Made In China: The Past, Present and Future of Chinese IPR

Conservative projections say that China will surpass the United States as the number one economy in the world by 2030, but the shift could happen as soon as next year. Either way, there’s no doubt that China has emerged as one of the most important commercial economies in the world, and businesses everywhere are vying to enter its market. However, there is a serious hurdle when foreign companies decide to take their products to China – intellectual property rights (IPR), or more accurately, the country’s lack of adequate IP protection. History shows that bringing business to China, while extremely lucrative, has also been extremely risky – but it’s a market that cannot be ignored. Here is a look at the past, present and future of IPR in China.

Chinese IPR before 2014

China has long been known as a manufacturing powerhouse – home to numerous legitimate Chinese and multinational production facilities. The problem over the past few decades has been that once Chinese producers learned how to manufacture foreign products, there were very few legal roadblocks to prevent them from reproducing those same products under different names and then pocketing the sales profits.

Back in 2004, CBS’ 60 Minutes reported that “15-20% of all goods in China are counterfeit” and there’s no evidence that the counterfeiting has slowed down in recent years. This has led to China’s reputation as one of the top global producers of cheap, IP-infringing knock-offs. In the US, for example, nearly 80% of all counterfeit goods seized in 2009 originated in mainland China. If Hong Kong and Taiwan are included in the count, that number jumps up to 90%. In 2011, reports showed that 8% of the country’s GDP consisted of unauthorized sales of counterfeit goods.

As you can imagine, this has led to numerous patent infringement lawsuits. The first Chinese patent infringement lawsuit was filed in 1988. Since then more than 20,000 infringement cases have gone to court and, in 2013, the average settlement awarded was $322 million. While that may sound positive, it has not always been the rightful innovators who won those awards. Patent trolls and trademark hijackers have a long history in China of claiming broad intellectual property rights for products they never intend to make or distribute and then waiting for the opportunity to sue genuine innovators.

As the names suggest, patent trolls acquire and hold onto patents they don’t intend to use, while trademark hijackers have relied on China’s “first filing” rule to claim successful foreign trademarks before the related companies enter the Chinese market. This happened to Apple in 2012 when the California-based tech company had to pay Proview Technology $60 million for ownership of the iPad trademark in China.

Chinese IPR from 2014-2016

In some cases, the past three years have shown an increased awareness and heightened discouragement of IP infringement. For example, the trademark law that cost Apple $60 million was updated on May 1, 2014 to deny claims for known company trademarks and to penalize trademark infringers.

Yet, only weeks before the new trademark law went into effect, a state-funded patent fund was established, called Ruichuan IPR Funds, and it was considered by many to be a government-backed patent troll. Ruichuan IPR Funds was seeded with $50 billion to build “a massive arsenal for use in harassment litigation,” according to Citizen Outreach. Not surprisingly, many foreign businesses were concerned with how China would use the fund. Summing up those fears, Citizen Outreach said, “China will now be in a better position to manipulate markets, handicap the overseas competition, and push itself to the head of the pack in the global patent wars.”

In 2015, China inarguably became head of the patent “pack.” This was highlighted in WIPO’s 2016 World IP Indicators, which compiled global IP statistics from 2015. It’s impossible to ignore China’s growing role on the international IP stage when, in 2015, it accounted for:

30% of all patents granted worldwide
38% of all patent applications filed worldwide
65% of all design applications filed worldwide
45% of all trademark applications filed worldwide.
2015 also marked the year that the Chinese patent office became the first to receive over 1 million patent applications in a single year and surpassed the US as the largest patent issuing office in the world. Notably, China has also become a world leader for gender equality in international patenting, with 50% of all Chinese patent applications from 2011-2015 filed by female inventors.

The future of Chinese IP (2017-2020)

Despite its progress in the past few years, the country has a long a way to go to salvage its reputation from its IP-infringing past. As recently as January 24th 2017, Dr. Roy Schestowitz, author at TechRights, said China is “rapidly becoming a patent cesspool full of patent trolls, boosted by low patent quality or armed by a wealth of patents that should never have been granted.” Perhaps in response to negative views like this around the world, the State Council of China recently launched a new IP strategy for its current Five-Year Plan (2016-2020) on economic and social development.

The new strategy focuses on strengthening IP rights through civil, criminal and judicial enforcement. It also sets some significant goals for the country to achieve by 2020:

Double the number of patents from 6.3 to 12 per every 10,000 people.
Double the amount of international patent applications from 30,000 to 60,000.
Increase IP royalties earned abroad from $4.4 billion to $10 billion.
Increase the public’s degree of satisfaction in IP protection to 80%.
The question now is twofold: Will these goals actually drive innovation and will China be able to meet them? There are concerns that the new strategy may provide incentives for artificial – not quality – growth. Ultimately, it will be up to innovators and the Chinese Patent Office to ensure that quality innovation continues moving forward – and not just as part of a numbers game.